Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98892
Authors: 
Sloof, Randolph
van Praag, Mirjam
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-056/V
Abstract: 
Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based performance measures —such as Economic Value Added (EVA)— is distorted, leading to unintended agent behavior. The paper uses a difference-in-differences approach to account for changes in economic circumstances and the self-selection of firms using EVA. Our findings indicate that EVA is a distorted performance measure that elicits the gaming response.
Subjects: 
Residual Income
Economic Value Added
distortion
performance measurement
incentive compensation
JEL: 
D21
G35
J33
L21
M12
M40
M52
Document Type: 
Working Paper

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